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French President Nicolas Sarkozy, right, and German Chancellor Angela Merkel (Martin Meissner/AP)
French President Nicolas Sarkozy, right, and German Chancellor Angela Merkel (Martin Meissner/AP)

Euro zone seeks breakthrough at Frankfurt summit Add to ...

Days before a critical European Union summit to come up with a credible plan for resolving the euro zone’s festering debt crisis, key politicians and officials held emergency talks in an effort to bridge rifts over the structure and financing of an expanded bailout fund.

The meeting in Frankfurt suggests policy makers have not yet reached consensus on how to proceed. Foreign officials, including Finance Minister Jim Flaherty, have said the Europeans need to take bold, decisive steps to restore confidence, shore up their banks, stabilize markets and prevent further deterioration of the global economy.

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German Chancellor Angela Merkel has already poured cold water on hopes of a quick resolution, warning that there will be no breakthroughs at the summit this Sunday and that “tough, long-term work” lies ahead. But French President Nicolas Sarkozy has sent a completely opposite signal, declaring that European leaders will “take important, very important decisions in the coming days.”

Bank of Canada Governor Mark Carney has urged European leaders to at least double the size of rescue fund, known as the European Financial Stability Facility, from its current level of €440-billion. And some economists have argued it will take much more than that to serve the fund’s purpose, which is to keep the crisis from spreading by helping other cash-strapped countries before they reach Greece’s sorry state.

Reports this week indicated the fund could be expanded to as much as €2-trillion, following an agreement between France and Germany. But no one has confirmed such a deal. And all signs point to continued divisions in the fight to save the euro.

The EFSF, which has been set up as a corporation jointly owned by the 17 euro-zone governments, is designed to lend money to countries in financial trouble, finance the recapitalization of financial institutions through loans to their governments and intervene in debt markets to restore stability. The member countries have agreed to put up guarantees, in a scale determined by the size of their economy, to backstop the fund. But they are not keen to make even bigger commitments.

The idea is to keep reduce Greece’s debt to a manageable level – effectively a default – while ensuring the exposed banks have enough capital to weather the storm and protecting other vulnerable euro-zone countries from being pummelled by the bond markets.

But differences appear to remain over the size of the losses Greece’s creditors, most of which are euro-zone banks, should be required to absorb as part of the strategy. Another sticking point is the relationship between the EFSF and the European Central Bank, which itself is a major Greek creditor. The ECB and Berlin have already blocked a plan to turn the bailout facility into a bank so it can raise its own capital and increase leverage. The fund cannot be used to provide direct guarantees against losses without violating the European Union’s constitutional ban on bailouts.

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